Lower rates boosting home loan size

DEMAND for housing has picked up but the latest finance figures suggest lower interest rates are boosting prices rather than construction activity.

Garry Shilson-Josling, AAP Economist

AAPMarch 13, 20135:27pm

DEMAND for housing has picked up but the latest set of finance figures suggests lower interest rates are boosting prices rather than construction activity.

The figures highlight on the fine line walked by central banks as they try to boost economic growth without pushing the economy into an episode of rising inflation.

And that's either a textbook case of rising consumer prices or an asset price boom that central bankers would probably have found no mention of in their undergraduate macroeconomics texts.

The seasonally adjusted figures from the Australian Bureau of Statistics showed the number of home loans - for those intending to live in the property they're buying - fell by just under two per cent from December to January and by a little less than one per cent over the year to January. (These figures exclude refinancing.)

But the value of home loans rose by just under two per cent for the month and three per cent through the year.

The implication is that the average value of loans must have risen by just over three and a half per cent in the month and by four per cent through the year.

And this pattern is recent.

All that rise in loan values (and by implication housing prices) came in second half of the year.

Even assuming the jump in January was a random blip, the bureau's trend estimates show the average non-refinancing loan size heading up at an annualised rate of nine per cent.

That translates into an extra half a billion dollars of credit going into the home loan market but no additional demand for actual homes.

That applies for new and to-be-built homes, where the number of home loans rose by a little more than nine per cent over the past year, but by only a half per cent in the second half of that year.

And the bureau's trend measure says the number of loans for new or to-be-built homes is now flatlining.

There are signs of life in the investor category, with the value of loans up by nearly 19 per cent over the year to January.

But investors make up only a third of housing lending.

In any case, the higher lending levels probably represent demand for apartment-style developments already built or nearing completion, after an upsurge in building approvals - since stalled - around the middle of last year.

So there is not much joy for the Reserve Bank of Australia in these figures.

With a housing price boom in the US taking centre stage in the global crisis in 2008 and ensuing world recession, central bankers are keenly aware of the need to avoid, if possible, any kind of asset price boom.

But the housing industry will still be a key part of any "rebalancing" of growth as the resource investment boom finally goes off the boil.

Finding the not-too-hot, not-too-cold, but just right degree of interest rate stimulus will be a truly neat trick if the RBA can pull it off.